Daily Archives: August 12, 2013

The seal of the Federal Reserve Board of Governors©AFP

It is strange to see the equivalent of a political campaign over succession at the US Federal Reserve. After all, the chair is a presidential appointment, subject to Senate confirmation. It is not an election and, in the past, deliberations over these appointments have always been private. However, leaks have fed a widespread perception that President Barack Obama will soon nominate either Lawrence Summers, his former chief economic adviser and former Treasury secretary, or Janet Yellen, the current vice-chair of the Fed board of governors, to the four-year term that begins in late January. Supporters of each, including some in the White House, are campaigning publicly, trying to sway the president.

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But this decision should not involve popularity or politics. Nor, like Supreme Court appointments, does it need to consider questions of balance. And it is not, like cabinet appointments, a matter of appointing an adviser to the president. Quite the contrary. The Fed is both independent of the executive branch and, more important, the most powerful group of financial firefighters on earth. So its chair is the world’s most important crisis manager. It was the Fed’s massive intervention that saved the world from a full-on global depression, following the collapse of credit markets in late 2008. Given recent history, it is just a matter of time before its emergency tools are required again.

That is the right context for evaluating the forthcoming appointment. We are certainly lucky to have had Ben Bernanke, the departing Fed chair, in the job: he served heroically in this firefighter role and has established a model for the future. The implosion of Lehman Brothers in September 2008 triggered the worst financial crisis in the developed world since the 1930s. Indeed, there was a moment when lending to whole sectors of the economy ground to a halt. Mr Bernanke grasped the scale of the risk of an economic Armageddon and engineered a colossal monetary response.

Ultimately, the Fed provided what Bloomberg has estimated to be a breathtaking $13tn of support for the US credit system. Further, it directly recapitalised and regulated the entire American banking system. That the US economy is recovering now, spurred by healthy bank lending, is a direct tribute to his leadership.

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It may not be 2008 any more but serious financial crises are occurring with ever greater frequency. Since the mid-1970s, after a multi-decade period of global market calm, we have seen repeated currency, banking and debt crises, often bringing crippling economic effects to the regions that experienced them. The two most damaging of these have hit within the past five years. It is worth reviewing the record of these events and why they are repeating themselves.

The decade beginning in 1979 saw a US dollar crisis, the Latin America debt crisis and the American savings and loan debacle. The first two required international rescues and the latter a giant bailout from Washington. Then, the pace of such disasters accelerated during the 1990s. Mexico’s finances collapsed, Russia defaulted, a large US hedge fund imploded and, scariest of all, much of southeast Asia fell into financial crisis in 1997 and 1998. Virtually all of these failures required emergency rescues, with the Fed, as the world’s most powerful central bank, in the lead.

These events were, however, dwarfed by the epic credit collapse of 2008 and the eurozone sovereign debt and banking crisis that began in 2010. The former induced the worst US recession since the 1930s and years of stagnation. The latter has created depression-like conditions in southern Europe and halted growth across the entire continent. Without the Fed’s intervention, there would have been catastrophe.

Why such repeated crises? The answer, in part, is globalised financial markets where a currency crisis in Thailand shakes New York. An additional factor is that the velocity of global money flows increases every year, driven by the pressure for investment returns. We have also seen weak financial policy and poor regulation in many of these instances.

However, the message of history is the repetition of such crises and how the next one can occur at any time and from an unexpected source. Indeed, it is probably 50-50 as to whether Mr Obama himself will face one during the final three- and-a-half years of his presidential term – one that could even threaten his economic legacy.

The next Fed chair, therefore, must be experienced in managing crises such as these. That brings us to the apparent choice between the two lead candidates. Full disclosure: I have worked with Prof Summers and know Ms Yellen slightly. Both are highly qualified in virtually every respect. But Prof Summers had the key role in the Clinton Treasury during both the Asian financial crisis and the Mexican default. And, later, in the Obama White House during the huge credit crisis in 2009.

It would be hard to find an American who is more battle- hardened. That is why he should be the choice.

The writer is executive chairman of Evercore and was deputy US Treasury secretary in 1993-94

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